Scenario analysis for fiscal regime  and stability

In our last publication, we highlighted the risks derived from an adjustment to the fiscal terms in  Exploration and Extraction contracts and the available protection mechanisms to mitigate such risks.  We said that fiscal elements can be defined by its legal stability (“stable” if they can be changed only  with contractors’ consent and “unstable” if they can be changed unilaterally by the government). In  this new document, we move a step forward as we analyze different scenarios to estimate the economic  impact of a variable fiscal regime over a typical E&P project lifetime.

The following two graphs show government take distribution and its behavior in a License Contract  (“LC”) and its fiscal elements. We marked with (*) the Additional Royalty (stable) and the Corporate  Income Tax (“CIT”) (unstable) as they are the main fiscal contributions of an E&P project (38% and 29%,  respectively).


1.- SENSITIVITY ANALYSIS

After modelling different scenarios of CIT rates, we found that changing the CIT rate by one percentage  point, (from 30 to 31) impacts negatively the Net Present Value by 8% (see table). This same variation  displaces the curve the cash flow curve to the dotted line (see graph).

2.- MITIGATING INSTABILITY

Contractors should be aware of the instability of CIT including its allowable deductions which are  contained in article 32 of the Hydrocarbons Revenue Law. Any change in the tax regime that affects the  original project economic balance (revenues – costs) at the time of awarding may be mitigated by the  contracts’ stabilization clauses. However, as mentioned in the last publication, SHCP has not published  yet the rules for applying the restoration of the economic balance.




Other sensitivity examples
1. The same scenario analysis was applied to  the Additional Royalty (stable element),  in which the impact on the net present  value of the project ranges from -3% to -16%.

2. For the Exploration and Extraction  Activity tax (unstable element) there is a  lower impact applying the same scenari-  os. The variation goes from -0.6% to -3.2%.




In Talanza we provide services of  advance modelling for financial  evaluation in the Mexican fiscal  regime, developed by former officials  in charge of the definition and  evaluation of contracts’ fiscal  behavior. This has benefitted our  clients’ cashflow-related decision  making processes.